What is worse when applying for a mortgage, a loan or having an overdraft?

abingdon5191

I have got an authorised overdraft of £3000 due to being furloughed and taking unpaid leave when my mother died suddenly. We are applying for a new mortgage in a years time. I won’t be able to pay all of this off by then. So would I be better taking a loan out or keep the overdraft? What would be deemed worse to the underwriters? 

sourcrates

Any kind of unaffordable debt is bad, debt is debt whichever label it has pinned to it.

Where mortgage lending is concerned, affordability is everything these days, you need enough disposable income to meet all your financial needs and then some, you also need a good credit history, its impossible to predict the exact outcome here, as all lenders have there own acceptance criteria, you just have to make yourself as financially attractive as you can.

Graham1982

However, and I am not contradicting @sourcrates at all here as he knows far more than I, I would assume a loan would possibly look better as constantly being in overdraft shows to a lender (irrespective of the circumstances) that you are not managing your day to day finances i.e. you are in a negative balance. Also there is credit utilization to consider here.

For example, if you have 3,000 available as an overdraft facility and are not using it you are sitting at 0% utilization. If however, you are sitting at the limit of the overdraft and then reduce it this month by say 500 pounds to 2500, you are utilizing all of your credit and this too looks bad. I would suggest that a loan might be better in these circumstances as this will show a trend of you making payments and reducing the balance and credit utilization is not a factor here.

However, as @sourcrates says, neither is good, I just think one is less bad.

Thanks
Graham

gizmo111

Is it a completely new mortgage or just when your current deal runs out?

Thrugelmir

Applying for a new mortgage, and selecting a new product with your existing lender are two entirely different matters. Which is it? 

Sncjw

Do you have. Balance owing on the overdraft 

ThunderHoof

Overdrafts are usually 40-50% interest, would make sense to take out a loan at a lower APR to pay it off or get a credit card and do a money transfer.